Tuesday, March 31, 2009

Today’s release of the S&P/Case-Shiller home price indices for January 2009 again confirms a worsening of deterioration seen in the nation’s housing markets with ALL of the 20 metro areas tracked reporting significant year-over-year declines and ALL metro areas showing large and even shocking declines from their respective peaks.

Further, there continues to be a notable re-acceleration of the price slide with the 10-city index dropping 2.52% and the 20-city index dropping 2.76% just since last month.

In all likelihood, we are now firmly sliding down an even more momentous slope of home price declines as the continued economic crisis and dramatically accelerating unemployment work to both crush consumer sentiment and force panicked mortgage lenders to continue to tighten their lending standards.

The 10-city composite index declined a record 19.40% as compared to January 2008 far surpassing the all prior year-over-year decline records firmly placing the current decline in uncharted territory in terms of relative intensity.

Topping the list of regional peak decliners were Phoenix at -48.50%, Las Vegas at -46.49%, Miami at -43.38%, San Francisco at -43.06%, San Diego at -40.78%, Los Angeles at -39.21%, Detroit at -38.95%, Tampa at -37.33%, Washington DC at -31.51%, Minneapolis at -29.77%, Chicago at -22.42%, Seattle at -19.72% and Boston at -17.39%.

Additionally, both of the broad composite indices showed significant declines slumping -30.16% for the 10-city national index and 29.11% for the 20-city national index on a peak comparison basis.

The following chart (click for larger version) shows the percent change to single family home prices given by the Case-Shiller Indices as compared to each metros respective price peak set between 2005 and 2007.

The following chart (click for larger version) shows the percent change to single family home prices given by the Case-Shiller Indices as on a year-over-year basis.

Additionally, in order to add some historical context to the perspective, I updated my “then and now” CSI charts that compare our current circumstances to the data seen during 90s housing decline.

To create the following annual charts I simply aligned the CSI data from the last month of positive year-over-year gains for both the current decline and the 90s housing bust and plotted the data with side-by-side columns (click for larger version).

What’s most interesting about this particular comparison is that it highlights both how young the current housing decline is and clearly shows that the latest bust has surpassed the prior bust in terms of intensity.

Looking at the actual index values normalized and compared from the respective peaks, you can see that we are still likely less than half of the way through the portion of the decline in which will be seen fairly significant annual declines (click the following chart for larger version).

The “peak” chart compares the percentage change, comparing monthly CSI values to the peak value seen just prior to the first declining month all the way through the downturn and the full recovery of home prices.

In this way, this chart captures ALL months of the downturn from the peak to trough to peak again.

As you can see the last downturn lasted 97 months (over 8 years) peak to peak including roughly 43 months of annual price declines during the heart of the downturn.

Notice that peak declines have been FAR more significant to date and, keeping in mind that our current run-up was many times more magnificent than the 80s-90s run-up, it is not inconceivable that current decline will run deeper and last longer.

The current Radar Logic data reported on residential real estate transactions (condos, multi and single family homes) that settled as late as January 26 appears to indicate that price declines are continuing in every market while accelerating notably in some.

Clearly, the impact of the recent stock market crash and ongoing economic crisis is bearing down on both consumer sentiment and, more fundamentally, credit availability resulting in a significant pullback in spending on homes and other costly purchases.

As the economic fallout continues, look for more markets to experience a reacceleration of price declines.

Phoenix, Miami, San Francisco, and Los Angeles are clearly continuing their historic price slide as the number of distressed sales climb and buyer sentiment relents under the weight of the recessionary conditions.

Boston, Denver and Chicago all appear to be following the typical seasonal pattern of increasing prices during the high transaction months of the spring and early summer and price declines during the fall and winter but it is important to note that prices are clearly trending and even, most notably for Boston, accelerating lower.

The Washington DC and New York regions are nearly perfect examples of markets that have broken down under the strain of the housing bust and wider economic turmoil showing consistent price declines throughout spring and summer months where normally strong seasonal sales patterns typically brings increasing prices.

Sunday, March 29, 2009

Again, the purpose of looking at the months of supply and overall inventory level is to see how imbalanced the new home market is.

So long as there is too much inventory, prices will fall.

Whereas in other markets (stocks, potatoes, etc.) falling prices can tend to lure in buyers, it appears that in the housing markets (new and existing) steadily declining prices may (at least for a time) tend to depress sales as buyers either become opportunistic for better deals or leery of buying into a large loss.

OR simply everything is playing out in the context of a weak economy where job market instability and flat to declining real incomes keeps buyer sentiment low… there are many ways to read it… certainly there are many different vicious circle cases to be made.

In any event, new home inventory levels are still too high for a convincing bottom in new home sales.

Study the following chart (click for larger) as it clearly illustrates the current imbalance.

Although in past “new home sale bottoms” the seasonally adjusted annual sales rate of new homes hovered around 400K units, the standing inventories were typically 100K units less resulting in a monthly supply of somewhere around 10 or less.

This obvious imbalance must defeat any sense of urgency (a key component of any home selling scam) for new home buyers particularly in areas where new homes dominate.

The extra inventory most likely appears obvious as certainly does the declining prices leaving even the most passive buyers logically sidelined for better deals and the new home market with continued declining sales.

As I had noted in my original post, historically it has been very unusual for there to be more than a 1.5% difference (either more or less) between the unemployment rates if Massachusetts and Rhode Island.

Recently though, we have seen a historically unusual spread between Rhode Island’s high and accelerating rate and Massachusetts’ far lower but now quickly rising rate.

In fact, the current 2.7% spread continues to exceed all but one spread seen in at least 40 years.This indicates that either Rhode Island’s current rate would need to fall dramatically or the Massachusetts rate would need to increase sharply…. My sense, especially in light of the financial turmoil seen since September, is that Mass will be the one playing catch-up.

Today’s regional unemployment report shows that, in February, the Rhode Island unemployment rate rose again to 10.5% while the Massachusetts rate jumped again to 7.8%.

In February, Massachusetts experienced the largest year-over-year increase in unemployment since the recessionary environment that followed the tech-led dot-com bust jumping 69.57% on a year-over-year basis clearly indicating that Mass has now entered a period of truly explosive unemployment growth.

Thursday, March 26, 2009

A few good days on the stock market and everyone thinks the sun has come out… these are delusional times indeed!

In this randomly recurring post I will attempt to persuade optimistic readers (particularly those readers who still have latent Bullish tendencies) to feel otherwise and further, if you know what’s good for you, to prepare for a decline that is more than likely shaping up as the worst of all possible scenarios.

You see… what we are experiencing today is NOT the normal pattern.

So you can spend all the time you like dwelling on the macroeconomic data of the last sixty years and traversing the curves… comparing… extrapolating… But you know what you’re not going to find?

You’re not going to find a period like we find ourselves in today.

What’s happening today is NOT normal.

What is normal anyway?

Certainly nothing that occurred in the last fifteen or twenty years was very normal… a stupendous speculative frenzy in the hi-tech sector and associated collapse followed somewhat simultaneously and subsequently by a truly astonishing binge of debt and delusion leading to an even larger speculative bubble and a truly widespread and catastrophic collapse.

So seeing what appears to be an endless stream of macroeconomic data drop off cliffs or shoot to the moon should come as no surprise.

We ran the system into the ground and now we will all get what we deserve… this is not a new story… no need to seek the advice of Nostradamus-types to see how this episode will play out… just brush up on your Aesop.

Today, I’ll start the series with some of the most recent data, yesterday’s “ray of sunlight”, the New Home sales and prices series.

As you can see by the following chart (click for larger) that plots new home sales and the year-over-year change to the monthly supply of new homes (all the data there is way back to 1963) the period between 1990 and 2005 saw new home buyers and home builders go on quite a binge… easily the largest and most extended period of new home building and selling in at least the last 40+ years.

Of course, after the jig was up things took a turn for the worse and if you look very closely you can see that the worst is, more than likely, not over for new home sales and prices.

Because the dramatic, nearly 20 year, bull-run in new homes was so colossal, the crash phase has been equally fantastic.

Probably the most important take away from the chart is that the months of supply is still growing at a non-seasonally adjusted annual rate of 21%, not a good sign for sales or prices.

Next look at a chart of the “real” median selling price of new homes (adjusted with CPI less shelter) versus the year-over-year change to the monthly supply of new homes.

As you can see from the chart, although real median selling prices have come down quite a bit there will more than likely be no meaningful bottom in the median selling price until inventories are sold off and the months of supply trends down substantially.

Finally, look at an important indicator of the job picture, the population adjusted continued jobless claims versus the year-over-year change to the monthly supply of new homes.

As you can see from the chart, continued claims are continuing to surge while the months of supply also continues to grow substantially… not the makings of an environment conducive to a turnaround for the new home market.

So, have we reached the bottom in new homes sales and prices?… not likely.

The new home market is seriously impaired with a large overhang of inventory and a slowing sales pace likely as the direct result of homebuyers facing the worst job and confidence situation of their lifetimes.

Today, the Department of Labor released their latest read of Joblessness showing seasonally adjusted “initial” unemployment claims increased 8,000 to 652,000 from last week’s revised 644,000 claims while “continued” claims surged a whopping 122,000 resulting in an “insured” unemployment rate of 4.2%.

It’s important to note that the continuing claims series is presenting the clearest picture of what is likely to be one of the most problematic aspects of this period of economic crisis namely how to make an immense and growing number of highly specialized (college educated) service/professional service workers productive again.

It’s obvious now that we have reached the first real test of our majority services-based economy.

Unlike the “tech-wreck” of 2000-2002, our current downturn is very broad, leaving no sector and virtually no corner of the country untouched.

With millions of college educated workers now on the market incomes will clearly suffer but moreover, it will be soon all too clear that our prior bubble economy significantly overproduced service workers (particularly professional service workers) for which current employment opportunities will be scant resulting in continued and fundamental vicious-cycle effects.

The following chart shows the recent trend in initial non-seasonally adjusted initial jobless claims with the year-over-year percent change acting as a rough equivalent of a seasonally adjustment.

Historically, unemployment claims both “initial” and “continued” (ongoing claims) are a good leading indicator of the unemployment rate and inevitably the overall state of the economy.

I have added a chart to the lineup which shows “population adjusted” continued claims (ratio of unemployment claims to the non-institutional population) and the unemployment rate since 1967.

Adjusting for the general increase in population tames the continued claims spike down a bit but as you can see, the pattern is still indicating that recession has arrived.

The following chart (click for larger version) shows “initial” and “continued” claims, averaged monthly, overlaid with U.S. recessions since 1967 and from 2000.

NOTE: The charts below plot a “monthly” average NOT a 4 week moving average so the latest monthly results should be considered preliminary until the complete monthly results are settled by the fourth week of each following month.

In the above charts you can see, especially for the last three post-recession periods, that there has generally been a steep decline in unemployment claims and the unemployment rate followed by a “flattening” period of employment and subsequently followed by even further declines to unemployment as growth accelerated.

This flattening period demarks the “mid-cycle slowdown” where for various reasons growth has generally slowed but then resumed with even stronger growth.

Until late 2007, one could make the case (as Fed chief Ben Bernanke surly did) that we were again experiencing simply a mid-cycle slowdown but now those hopes are long gone.

Adding a little more data shows that in the early 2000s we experienced a period of economic growth unlike the past several post-recession periods.

Look at the following chart (click for larger version) showing “initial” and “continued” unemployment claims, the ratio of non-farm payrolls to non-institutional population and single family building permits since 1967.

The most notable feature of the post-“dot com” recession era that is, unlike other recent post-recession eras, job growth has been very weak, not succeeding to reach trend growth as had minimally accomplished in the past.

Another feature is that housing was apparently buffeted by the response to the last recession, preventing it from fully correcting thus postponing the full and far more severe downturn to today.

It is now completely clear that the potential “mid-cycle” slowdown that appeared to be shaping up in late 2007, had been traded for a less severe downturn in the aftermath of the “dot-com” recession, and now has we have fully entered, instead, a mid-cycle meltdown.

Looking at the report more closely it’s easy to see that the quarter was a disaster overall with huge double-digit declines to Durable Goods, Exports of Goods and Fixed Investment with the only crutch to lean on being Nondefense Government “investment”.

Wednesday, March 25, 2009

Today, the U.S. Census Department released its monthly New Residential Home Sales Report for February showing continued deterioration in demand for new residential homes across every tracked region resulting in a startling 41.08% year-over-year decline and a truly horrendous 75.74% peak sales decline nationally.

It’s important to keep in mind that this stunning year-over-year decline is coming on the back of the significant declines seen in 2006, 2007 and 2008 further indicating the enormity of the housing bust and clearly dispelling any notion of a housing bottom having been reached.

Additionally, although inventories of unsold homes have been dropping for well over a year, the sales volume has been declining so significantly that the sales pace now stands at an astonishing 12.2 months of supply.

The following charts show the extent of sales declines seen since 2005 as well as illustrating how the further declines in 2009 are coming on top of the 2006, 2007 and 2008 results (click for larger versions)

Look at the following summary of today’s report:

National

The median sales price for a new home declined 18.1% as compared to February 2008.

New home sales were down 41.08% as compared to February 2008.

The inventory of new homes for sale declined 30.8% as compared to February 2008.

The number of months’ supply of the new homes has increased 25.8% as compared to February 2008 and now stands at 12.2 months.

Regional

In the Northeast, new home sales were down 25.6% as compared to February 2008.

In the Midwest, new home sales were down 35.1% as compared to February 2008.

In the South, new home sales were down 38.5% as compared to February 2008.

In the West, new home sales were down 54.2% as compared to February 2008.

The purchase application index has been highlighted as a particularly important data series as it very broadly captures the demand side of residential real estate for both new and existing home purchases.

The latest data is showing that the average rate for a 30 year fixed rate mortgage decreased a whopping 26 basis points since last week to 4.63% while the purchase application volume increased just 4.16% and the refinance application volume jumped 41.48% compared to last week’s results.

It’s important to recognize that the Federal Reserve’s “quantitative easing” measures have clearly pushed mortgage rates down spurring increased re-finance activity yet the rate reductions have yet to impact purchase activity, arguably the more important goal.

The following chart shows how the principle and interest cost and estimated annual income required to cover the PITI (using the 29% “rule of thumb”) on a $400,000 loan has changed since November 2006.

The following chart shows the average interest rate for 30 year and 15 year fixed rate mortgages over the last number of weeks (click for larger version).

The following charts show the Purchase Index, Refinance Index and Market Composite Index since November 2006 (click for larger versions).

Tuesday, March 24, 2009

The latest results of the Moody’s/REAL Commercial Property Index strongly suggests that the nation’s commercial real estate markets are now firmly experiencing a tremendous downturn with prices plummeting a whopping 19.08% on a year-over-year basis and a stunning 21% since the peak set in October 2007.

The Moody’s/REAL CPPI data series is produced by the MIT/CRE but is noted to be “complimentary” to their alternative transaction based index (TBI) as it is published monthly and is formulated from a completely different dataset supplied by Real Capital Analytics, Inc.

Further, the single family median home value declined a whopping 18.5% on a year-over-year basis to $252,500 while condo median prices dropped 15.4% to $213,250.

Clearly, the impact of the recent stock market crash (that keeps on crashing) and ongoing economic crisis is bearing down on both consumer sentiment and, more fundamentally, credit availability resulting in a significant pullback in spending on homes and other costly purchases.

It’s perfectly clear now that home sellers that choose to wait out the “down market” did so in vain as the 2008 selling season marked likely the last opportunity to sell any residential property at anywhere near the prices set in the peak boom years.

With confidence depressed and eroding and sale volumes this low, Boston area home prices have nowhere left to go but down.

Of course, the new Massachusetts Association of Realtor president Gary Rogers strikes a more hopeful tone while embracing government handouts for his industry:

“We continue to be hopeful that sales will increase in the coming months as buyers take advantage of the combination of low prices, low interest rates and the $8,000 federal first-time homebuyer tax credit that expires on December 1, 2009,”

It’s important to keep the following points in mind when considering the impact of the homebuyer tax credit legislation:

The credit is for “first time” home buyers only… if you have had ownership interest in any home (including condos) anytime in the last three years you are NOT eligible.

The credit has income restrictions of $75,000 for individuals and $150,000 for married couples filing jointly.

The credit can only be used for principle residence.

The credit cannot be applied to the downpayment.

So this is really a very limited program which will very likely NOT result in any noticeable increase in demand in our area.

MAR reports that in February, single family home sales declined 11.42% as compared to February 2008 with a 16% decline in inventory translating to 15.4 months of supply and a median selling price decline of 18.5% while condo sales dropped 16.4% with an 24% decline in inventory translating to 16.0 months of supply and a median selling price decline of 15.4%.